Even if we’re talking up the idea of an exit from technical recession in 2010, most of us will spend the year working to numbers conjured up by the effects of a torrid 2009 and planning along those lines.
The challenge for finance directors in 2010 is to manage that against being ready – financially and strategically – to take advantage of any opportunities for growth that arise.
That means arming the finance function with the right sort of information on what money is leaving the business and why, as well as what is coming in and from where, where the business should try to stimulate growth and where it might yet withstand slimming down.
If that sounds like a moot point – something you already do automatically – then you may be doing two jobs at once: the FD job and that of the chief performance officer (CPO).
Exclusive research undertaken by Financial Director has shed light on FDs’ understanding of this emerging role. From more than 200 FDs we surveyed, 61% think they are already performing the job and if they are not, they’re very likely to be in close and regular communication with the CPO – while 76% think the FD or CFO is the natural and right person to do so as the crossover with their role is so great.
The CPO job is about getting rid of wasteful practices and finding efficiencies, typically doing so by focusing on becoming an organisation’s measurement guru and being able to gather, analyse, report and use data to push change. That’s not far removed from a modern FD’s job, which is probably why the two are part of an ever more merged Venn diagram.
While it is a relatively nascent concept in the UK, the CPO is such a firm fixture in the US business world that US President Barack Obama appointed one for his administration in Jeffrey Zients, a well-known entrepreneur and chief executive of various businesses. Zients was put in post as CPO to find and eli minate waste and unnecessary cost from federal budgets and management, citing measurement as a cornerstone of his approach to the job.
“Most metrics are process-orientated and not outcomes-based. We do not track progress on goals that cut across agencies,” he says. “Overall, too much emphasis has been placed on producing performance information to comply with a checklist of requirements instead of using it to drive change. Federal managers and employees at all levels must use performance goals and measures to set priorities, monitor progress and diagnose problems. They need to learn how to use goals and measures to motivate the best from our workforce and our service delivery partners to achieve greater results and to allocate scarce resources wisely.”
While in the US the CPO role is usually separate from that of the CFO, Financial Director’s research underlines that many FDs in the UK are doing a lot of what is perceived to be the CPO role, from using performance management systems to gather financial and non-financial data, to helping their businesses to be ready to make changes and to do more than survive recession.
The demand for the FD’s knowledge and expertise in paying attention to expenditure has cemented their authority in the past year and this increased pressure has meant FDs are being asked to provide an increasing amount of business intelligence and performance management information from across the various divisions of their companies. To make their increased visibility across a business a permanent fixture once the economy is on the up, FDs would do well to examine the CPO role and how to incorporate this into their thinking.
We asked the UK FDs responding to our survey to tell us if they use performance management systems in their work. While 60% of those who responded to this question said ‘no’, a further 58% of respondents said they would do in 2010 and beyond outlining the growing demand on FDs to be the gatherers and distributors of critical performance information.
In terms of how FDs use these systems, FDs put the usual suspects – management and reporting, budgeting and forecasting, and profitability and cost management – in the top three areas of use now. These change slightly looking into the priorities for 2010 and beyond, with strategy management and balanced scorecards gaining importance.
Expanding this question out, cost management, sales and divisional reporting are high on the list now. Finance directors tell us that they will use performance management data gathering to refocus on investing in profitability and strategy, marketing and business opportunities.
That will put the finance function on the map as businesses claw their way back to making money. And being the bearer of data that can underpin a growth strategy in 2010 will add to this. As 27% of FDs report the information discussed above directly into the chief executive and a further 27% report it directly to the group board, understanding the data and being able to help forge it into a growth strategy they can understand will be paramount. Many say they report down to divisional managers too, giving them exposure to the business at large away from the finance function and reinforcing their relationship with those managers.
A tighter watch on performance levels from senior level members of staff in businesses has placed a greater emphasis on the FDs role in reporting requirements. Before the credit crunch, companies may have been sufficiently content to receive performance management measurement updates over longer periods of time. Now there is a greater sense of urgency to keep firmly abreast of various issues across all business lines. Therefore, many forecast that they will increase the frequency of their reporting with 18% expecting to move into weekly performance management reporting in 2010 and beyond and 10% expecting to start reporting daily.
Taking in the CPO’s role to measure risks to performance, FDs overwhelmingly believe the role of the CPO should encompass internal non-financial risk management and analysis; 95% say this, while almost 84% of survey respondents say the CPO role should also incorporate external non-financial and operational risk management and analysis.
While these changes will mean more work and more frequent communication with the business, many FDs will have already settled into this. But FDs look set to benefit from incorporating the CPO job into their role in a number of ways, not least in that it gives them the opportunity to have much clearer data on their own performance and understanding of what makes the business tick. Fundamentally, the more visible you are reporting useful data and shaping strategy, the greater your clout.
All systems go
The systems FDs use to collect performance data may not be flexible enough to meet their changing needs in 2010.
When it comes to improving and empowering the role of the FD in the boardroom, there is still much work to be done. More people responding to our survey on the FD undertaking the CPO role told us they did not have access to performance management information than those that did. Alarmingly, a high percentage of survey participants do not know if they have access to such information and 16% do not know if they will have access to in the future.
Looking more specifically at the quality and usefulness of performance management data FDs currently have access to, 34% of respondents believe it contains the right amount of detail but a further 27% believe that while satisfactory, the data does not provide some types of information needed to evaluate performance and the risks to it.
Nearly 14% feel the data was adequate in 2009 but are now concerned that the systems they have access to are not sufficiently flexible to respond to their needs in the future. FDs anticipate a greater need for performance management data on non-financial risks. Encouragingly, 45.7% of FDs feel they have an adequate understanding of non-financial operations and conditions to interpret the data collated. However, 2% admit they don’t understand the data they obtain.
FDs and CFOs are embracing the concept of a changing job description as it looks set to enhance their value in a company. They are willing to adapt but what is of primary concern is that the data systems will not be able to keep pace with the changes. Without the data systems adaptation and improvements, companies may flounder as they fail to keep track of what is going on in their business. That is an area in which FDs will play a bigger part.
Financial Director ran this research on behalf of SAP BusinessObjects